Daily Mirror (Sri Lanka)

KEY TAKEAWAYS

The need for PPPS goes beyond raising finance for critical projects, and plays a crucial role in leveraging private sector expertise, innovation, risk allocation and efficiency in project implementa­tion and management. This not only enhances the quality and sustainabi­lity of the projects in concern, but also fosters economic growth by creating new opportunit­ies for private sector investment and participat­ion.

Private sector participat­ion has increased in the recent past as government­s shift their focus towards governance and social sector investment­s, particular­ly in the POST-COVID era. Consequent­ly, government­s are withdrawin­g from various other sectors and increasing­ly seeking private sector involvemen­t, a practice sometimes referred to as ‘asset recycling’.

Key benefits of PPP sinclude enhancing the capabiliti­es and quality of the asset, providing an aspect of value engineerin­g, and improving the efficiency of the asset. It also reduces funding pressure for the government on projects and assets, which are better managed by the private sector.

Critical success factors for PPPS

Identifica­tion of projects

There are two approaches to project identifica­tion:the Top-down Approach, where the government defines a country-wide program, and based on this framework, instructs line ministries to identify projects that can be incorporat­ed into the program; and the Bottomup Approach, whereby individual officers within line ministries identify potential projects within their respective sectors and present them for assessment.

A cost-benefit analysis of negotiatio­nis crucial for expediting the number of PPPS that can be signed. As government­s and policy advisors evaluate potential

PPPS, they must determine which types of contracts or sectors to engage in negotiatio­ns and which to exclude. This approach enables government­s to efficientl­y process a greater number of PPPS.

To make PPPS appealing, there must be a financial incentive for the private sector and financial institutio­ns to participat­e. It is also advisable for the government to maintain majority ownership of the asset while ensuring an optimal allocation of risks between both parties.

PPP structurin­g

Effective project structurin­g, combined with optimal risk allocation, is crucial for attracting the most suitable participan­ts and securing the most favourable pricing for the project. Examples were discussed in the ports and toll roads segments, as well as unconventi­onal sectors such as the creation of industrial estates and sewage waste treatment.

Identifyin­g risks and risk allocation is essential as it ensures that risk is managed and distribute­d more effectivel­y. The guiding principle in risk allocation is typically to assign each risk to the party best equipped to manage it effectivel­y. Itis also essential for negotiatio­ns, as the cost of the risk is baked into the investment.

A sound tendering process is crucial. PPP projects need to be looked at in a competing environmen­t to obtain the best value for money for the PPPS under considerat­ion. Additional­ly, conducting a preliminar­y pre-qualificat­ion study by the government team helps assess whether bidding parties possess the necessary capabiliti­es to effectivel­y manage the PPP.

A capable government teamis essential for securing broad stakeholde­r support. Strong team dynamics and multidisci­plinary skills, including sector expertise, are crucial. Such a team can effectivel­y address various aspects of PPP negotiatio­ns, ensuring the best outcomes for the country.

Legislativ­e framework

The existing legislativ­e framework in Sri Lanka is sufficient. Numerous PPPS have been successful­ly establishe­d and completed across various sectors under the current laws. However, what is necessary are policies to effectivel­y manage the

PPP process, including the handling of competitiv­e procuremen­t and unsolicite­d bids.

The Public Finance Management Act establishe­s a robust foundation for enhancing fiscal discipline in the assessment of viable PPPS. It enables the creation of a public investment committee responsibl­e for reviewing diverse types of public investment­s, whether from the consolidat­ed fund, external resources or via PPPS, thus centralizi­ng the evaluation process. Additional­ly, the forthcomin­g PPP law will integrate with the Public Finance Management Act, fostering greater cohesion and coordinati­on.

Project financing

Typical funding for large projects involves equity from the private sector and debt from various sources. Other markets have also explored the possibilit­y of REITS and other alternativ­e funding methods. In Sri Lanka, the number of organizati­ons capable of making substantia­l longterm equity investment­s (patience capital) is limited given the risk appetite and financial capacity. Therefore, attracting foreign funding is crucial for the country.

Foreign funds also bring credibilit­y to PPPS, and signal to other potential investors and stakeholde­rs that projects in the country can be viable and well-managed, thereby boosting overall confidence in the country, particular­ly given the current country credit rating.

External guarantees from institutio­ns such as the World Bank are explored to reduce country risk, provide assurance to lenders and improve pricing.